Problem

Limitations on capital development in rural areas


Experimental visualization of narrower problems
Other Names:
Lack of agricultural community funds
Restricted capital resources in small communities
Lack of local capital
Lack of rural financial surplus
Limited accumulation of rural capital
Limited local availability of capital reserve
Nature:

Current trends in the world's economy are increasingly demanding that local economic units and communities should sustain their own populations. However, the complexity of present-day society renders relatively large and rapid investments of money and pooled resources necessary in order to begin community development, and to start-up and expand business and services in both private and public sectors. In contrast to the trend for effective income realization to require ever larger units employing substantial capital for specialized production, the limited capital of small farms and businesses at the village level forces a fragmented, marginal level of production.

There is a wide disparity of economic resources among landowners, tenant farmers and farm labourers in rural agricultural communities and the day-to-day marginal cash flow pattern is one which most small farmers find hard to break. This pattern reinforces the habit of purchasing for immediate needs which prevents long-range planning or budget management. Banking services are remote and not generally utilized by those with small sums to save; and with unclear land ownership, the collateral required for loans is difficult to secure. Obtaining such loans can be a time-consuming process and often the money may not be secured at an appropriate time when it is most needed. Added to this, the amount of capital obtained is often inadequate to secure the full complement of equipment or technical aid in order for the the additional investment to be a profitable venture. Capital funds needed for initial development of essential services are therefore often inaccessible. Sporadic sources of outside capital are an unstable funding base, but residents find it difficult to develop ways and means of mobilizing their own investment capital.

Incidence:

[Developing countries] The growth of national and international corporations in the last 40 years has created enormous concentrations of capital throughout the world. Developing villages have begun to experience the impact of the interchange of these funds, but have little or no way to participate in it. In fact, they often experience more goods and services going out than coming in, thus crippling a solid financial base. Despite the proximity of credit sources, the community experiences difficulty in attracting capital for business development due to high interest rates, lack of understanding of rules and regulations and inconsistent means of repayment. The generation of capital within the community is restricted by low wages of workers and the almost immediate out-flow of resources to the city for purchase of goods and services. It is increasingly evident that unless the flow of money is reversed towards the village, there can be little significant economic development as a self-sustaining community.

As a result, rural communities in developing countries are experiencing the strain of carrying a greater financial burden as they participate more and more in the money economy. Bartering and in-kind wages to farm workers are being replaced by money wages, so that land owners need more capital on hand, while at the same time local credit lines and banking are only just beginning to be effective. While village economy requires diversified crops and the introduction of new cash crops, the necessary risk capital is simply not available. Most of the population continues to exist at the subsistence level, working for low wages, or farming just enough land to provide for the family. Most of the money earned from marketing goods, from government purchases or from wages, is spent in the market towns or farther away, taking money out of the community and bringing little back. Small shops bring little money into the community since goods are purchased at retail prices in the towns and resold locally at only a small profit margin. Since the only significant transport of goods takes place between towns and cities, the cost of transport to villages is disproportionately high. This results in an even higher cost of living for residents who already have a lower income than people in the larger towns. They are permanently aware of not having enough money and of never seeing any real change.

Many people are employed outside their home villages; they come to the village only at weekends, and most of their earnings remain in the city. Residents purchase almost all personal and household goods and services outside the village on a small scale limited by what one person can carry. People are motivated to sell quality food which they need for their families and to purchase supplies outside their villages, further draining local capital and reducing employment alternatives within the village. These spending patterns continue the cycle of money out of local circulation and inhibit buildup of financial reserves that could be used as collateral to float loans or build up credit. Limited capital restricts local processing, so products are marketed as inexpensive raw materials; and the absence of local markets forces dependence on costly middleman services in order to allow goods to reach outside markets. People come to feel there is no hope for money or investment.

 

Claim:

The economies of many rural communities have suffered for years because of the absence of new money. The necessity for rapid social and economic development requires direct, predictable access to available sources of capital, and they urgently require methods which will enable them to use available capital creatively and to generate new capital advantages. Because past economic ventures may have proved unrewarding, further attempts at local initiative tend to be discouraged. This loss of incentive in the face of the obvious capital needs creates an overwhelming burden on many communities and prevents residents from seeking new skills which would lead to higher income.

Problem Type:
D: Detailed problems
Date of last update
01.11.2017 – 21:12 CET